-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NL8wO0Ft276zHW+46/kpW2zKIvb9IIu+hxNKHNHEyN4ey1AOoK48+ddCyjHbGV01 bttCx8rI0c5MrHCTMqa3Qw== 0000950124-97-006023.txt : 19971117 0000950124-97-006023.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950124-97-006023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITOL BANCORP LTD CENTRAL INDEX KEY: 0000840264 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382761672 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-24728-C FILM NUMBER: 97720872 BUSINESS ADDRESS: STREET 1: ONE BUSINESS & TRADE CNTR STREET 2: 200 WASHINGTON SQ N CITY: LANSING STATE: MI ZIP: 48933 BUSINESS PHONE: 5174876555 MAIL ADDRESS: STREET 1: ONE BUSINESS & TRADE CENTER STREET 2: 200 WASHINGTON SQUARE NORTH CITY: LANSING STATE: MI ZIP: 48933 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to -------------- ----------- Commission file number 33-24728C CAPITOL BANCORP LTD. (Exact name of registrant as specified in its charter) MICHIGAN 38-2761672 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) Number) 200 WASHINGTON SQUARE NORTH, LANSING, MICHIGAN (Address of principal executive offices) 48933 (Zip Code) (517) 487-6555 (Registrant's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common stock, No par value: 4,723,194 shares outstanding as of October 31, 1997. Page 1 of 21 2 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated balance sheets - September 30, 1997 and December 31, 1996. Consolidated statements of income - Three months and nine months ended September 30, 1997 and 1996. Consolidated statements of cash flows - Nine months ended September 30, 1997 and 1996. Notes to consolidated financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Item 2. Changes in Securities. Item 3. Defaults Upon Senior Securities. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES Page 2 of 21 3 PART I, ITEM I CAPITOL BANCORP LTD. Consolidated Balance Sheets As of September 30, 1997 and December 31, 1996
September 30 December 31 1997 1996 ------------ ----------- (in thousands) ASSETS Cash and due from banks $ 22,443 $ 20,928 Interest-bearing deposits with banks 145 55 Federal funds sold 59,450 42,350 --------- --------- Cash and cash equivalents 82,038 63,333 Loans held for resale 10,000 6,749 Investment securities: Available for sale, carried at market value 60,140 46,622 Held for long-term investment, carried at amortized cost which approximates market value 2,217 2,103 --------- --------- Total investment securities 62,357 48,725 Portfolio loans: Commercial 365,400 283,461 Real estate mortgage 62,755 53,712 Installment 33,216 20,450 --------- --------- Total portfolio loans 461,371 357,623 Less allowance for loan losses (5,758) (4,578) --------- --------- Net portfolio loans 455,613 353,045 Investment in and advances to Amera Mortgage Corporation 2,787 2,831 Premises and equipment 6,787 5,421 Accrued interest income 3,963 3,107 Excess of cost over net assets of acquired subsidiaries 2,203 2,347 Other assets 8,078 6,705 --------- --------- TOTAL ASSETS $ 633,826 $ 492,263 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing $ 66,908 $ 62,766 Interest-bearing 496,400 373,400 --------- --------- Total deposits 563,308 436,166 Debt obligations 11,825 6,500 Accrued interest on deposits and other liabiliites 5,047 4,708 --------- --------- Total liabilities 580,180 447,374 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 9,817 4,730 STOCKHOLDERS' EQUITY Common stock, no par value: 10,000,000 shares authorized; issued and outstanding 1997 - 4,723,194 shares 1996 - 4,504,911 shares 36,818 34,972 Retained earnings 7,856 5,150 Market value adjustment (net of tax effect) for investment securities available for sale 170 37 --------- --------- 44,844 40,159 Less note receivable from ESOP (1,015) --------- --------- Total stockholders' equity 43,829 40,159 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 633,826 $ 492,263 ========= =========
Page 3 of 21 4 CAPITOL BANCORP LTD. Consolidated Statements of Income For the Three Months and Nine Months Ended September 30, 1997 and 1996 (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30 September 30 ------------------- -------------------- 1997 1996 1997 1996 ------- -------- --------- --------- Interest income: Portfolio loans (including fees) $ 11,118 $ 8,004 $ 30,326 $ 22,862 Loans held for resale 192 207 377 656 Taxable investment securities 965 575 2,585 1,616 Federal funds sold 733 449 1,973 1,025 Interest-bearing deposits with banks 4 10 8 35 Dividends on investment securities and other 27 26 182 337 ------- ------- ------- ------- Total interest income 13,039 9,271 35,451 26,531 Interest expense: Demand deposits 1,062 592 2,850 1,683 Savings deposits 402 359 1,164 1,014 Time deposits 4,882 3,502 13,151 9,828 Debt obligations and other 336 95 468 471 ------- ------- ------- ------- Total interest expense 6,682 4,548 17,633 12,996 ------- ------- ------- ------- Net interest income 6,357 4,723 17,818 13,535 Provision for loan losses 476 274 1,442 751 ------- ------- ------- ------- Net interest income after provision for loan losses 5,881 4,449 16,376 12,784 Noninterest income: Service charges on deposit accounts 239 171 614 539 Trust fee income 86 67 244 199 Gain on sale of investment securities available for sale 13 2 30 82 Other realized gains 495 Other 158 249 319 364 ------- ------- ------- ------- Total noninterest income 496 489 1,702 1,184 Noninterest expense: Salaries and employee benefits 2,300 1,558 6,204 4,395 Occupancy 380 228 1,009 654 Equipment rent, depreciation and maintenance 548 262 1,437 686 Deposit insurance premiums 22 350 64 415 Other 849 800 3,201 2,674 ------- ------- ------- ------- Total noninterest expense 4,099 3,198 11,915 8,824 ------- ------- ------- ------- Income before federal income taxes 2,278 1,740 6,163 5,144 Federal income taxes 802 562 2,105 1,717 ------- ------- ------- ------- NET INCOME $ 1,476 $ 1,178 $ 4,058 $ 3,427 ======= ======= ======= ======= NET INCOME PER SHARE: Primary $ 0.30 $ 0.26 $ 0.85 $ 0.82 ======= ======== ======== ======== Fully Diluted $ 0.30 $ 0.26 $ 0.83 $ 0.81 ======= ======== ======== ========
Page 4 of 21 5 CAPITOL BANCORP LTD. Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 1997 and 1996
1997 1996 --------- --------- (in thousands) OPERATING ACTIVITIES Net income $ 4,058 $ 3,427 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 1,442 751 Depreciation of premises and equipment 872 437 Amortization of excess of cost over net assets of acquired subsidiaries 145 145 Net amortization of investment security premiums (accretion of discount) (260) (114) Gain on sale of premises and equipment 501 6 Originations and purchases of loans held for resale (98,145) (153,960) Proceeds from sales of loans held for resale 94,894 153,315 Increase in accrued interest income and other assets (3,268) (252) Increase (decrease) in accrued interest on deposits and other liabilities 339 (25) -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 578 3,730 INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale 3,481 4,460 Proceeds from maturities of investment securities 26,061 26,911 Purchases of investment securities (42,714) (38,834) Net increase in portfolio loans (104,010) (49,126) Proceeds from sales of premises and equipment 380 13 Purchases of premises and equipment (3,119) (1,267) -------- --------- NET CASH USED BY INVESTING ACTIVITIES (119,921) (57,843) FINANCING ACTIVITIES Net borrowings (payments) on debt obligations 5,325 (1,650) Resources provided by minority interest in consolidated subsidiaries 5,087 4,966 Net proceeds from issuance of common stock upon exercise of stock options and warrants 1,846 4,902 Cash dividends paid (1,352) (988) Increase in demand deposits, NOW accounts and savings accounts 41,798 15,988 Increase in certificates of deposit 85,344 35,670 -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 138,048 58,888 -------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 18,705 4,775 Cash and cash equivalents at beginning of period 63,333 45,331 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,038 $ 50,106 ======== =========
Page 5 of 21 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CAPITOL BANCORP LTD. Note A - Basis of Presentation The accompanying condensed consolidated financial statements of Capitol Bancorp Ltd. have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all information and footnotes necessary for a fair presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The statements do, however, include all adjustments of a normal recurring nature (in accordance with Rule 10-01(b)(8) of Regulation S-X) which the Corporation considers necessary for a fair presentation of the interim periods. The results of operations for the nine-month period ended September 30, 1997 are not necessarily indicative of the results to be expected for the year ending December 31, 1997. The consolidated balance sheet as of December 31, 1996 was derived from audited consolidated financial statements as of that date. Certain 1996 amounts have been reclassified to conform to the 1997 presentation. Note B - Implementation of New Accounting Standards Financial Accounting Standards Board Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", establishes new guidelines for accounting for certain transactions, such as sales of loans and loan participations. This new standard became effective for the Corporation January 1, 1997. Implementation of this new accounting standard had no impact on the Corporation's financial position or results of operations for the period ended September 30, 1997. Note C - New Operating Units In a stock-for-stock exchange transaction effective May 22, 1997, Bank of Tucson (previously a 51% owned consolidated bank subsidiary) became a wholly-owned subsidiary of a newly formed bank holding company, Sun Community Bancorp Limited ("Sun"). As a result of the exchange transaction, Sun became a 51% owned, second-tier subsidiary bank holding company of the Corporation. Sun was formed for the purpose of facilitating future expansion opportunities in the southwestern portion of the United States and related data processing, operations support and other ancillary services and functions for Bank of Tucson and future banks. In June 1997, Sun completed a $4.5 million offering of 250,000 shares of common stock including $2.3 million invested by the Corporation, maintaining its 51% interest in Sun. Proceeds from the offering are expected to be used in Sun's expansion activities, primarily de novo bank development. 6 of 21 7 On June 30, 1997, Valley First Community Bank, a de novo bank, commenced operations in Scottsdale, Arizona. The Bank was capitalized with $4.5 million, of which $2.3 million was invested by Sun with the remainder invested by individuals and other entities primarily located in the Scottsdale and Phoenix area. Valley First Community Bank is 51% owned by Sun and, accordingly, is consolidated with Sun for financial reporting purposes. Because of the Corporation's majority interest in Sun, Sun's consolidated financial position and results of operations are included in the Corporation's consolidated financial statements with corresponding accounting recognition of applicable minority interest. Brighton Commerce Bank, a de novo bank located in Brighton, Michigan, was formed in early January 1997. The Corporation's investment in this new bank ($1.6 million) was funded primarily from proceeds from exercise of stock options and borrowings. The Corporation owns 59% of the common stock of Brighton Commerce Bank and the Bank is consolidated for financial reporting purposes with corresponding accounting recognition given to applicable minority interest. Note D - Prospective Impact of New Accounting Standards Not Yet Adopted The Financial Accounting Standards Board ("FASB") has issued certain new standards which affect accounting and financial reporting. FASB Statement No. 128, "Earnings per Share", will revise the computation and reporting of earnings per share. This new standard is intended to simplify the basis upon which per-share amounts are determined, replacing "primary" earnings per share with "basic" earnings per share. "Fully diluted" earnings per share will be replaced by "diluted" earnings per share. The Statement will become effective for the Corporation's year end 1997 consolidated financial statements and will result in restatement of per-share amounts for prior periods. Early adoption of the new standard is not permitted. Based on management's preliminary analysis of the new accounting standard and related computational requirements, a comparative summary of earnings per share follows:
Three Months Ended Nine Months Ended September 30 September 30 ----------------------- ----------------------- 1997 1996 1997 1996 ---- ---- ---- ---- As originally reported: Primary $ .30 $.26 $.85 $ .82 ======= ====== ===== ===== Fully Diluted .30 .26 .83 .81 ======= ====== ===== ===== As restated: Basic earnings per share .31 .27 .88 .85 ======= ====== ===== ===== Diluted earnings per share .30 .26 .86 .85 ======= ====== ===== ===== Year Ended December 31 -------------------------------------------------------- 1996 1995 1994 1993 ----------- -------------- ----------- -------------- As originally reported: Primary $1.09 $.79 $.64 $.40 ====== ====== ====== ======= Fully diluted 1.04 .77 .64 .40 ====== ====== ====== ======= As restated: Basic earnings per share 1.11 .84 .68 .41 ====== ====== ====== ======= Diluted earnings per share $1.10 $ .82 $.67 $ .41 ====== ====== ====== =======
Page 7 of 21 8 FASB Statement No. 129, "Disclosure of Information about Capital Structure", clarifies the extent and nature of disclosures relating to an entity's capital structure. It requires nonpublic companies to disclose information which has been required for public companies in the past. This new standard will become effective for the Corporation's year end 1997 consolidated financial statements and, upon implementation, is not expected to have a material impact. FASB Statement No. 130, "Reporting of Comprehensive Income" addresses the reporting and display of 'comprehensive income' and its components (revenue, expenses, gains and losses) in a full set of financial statements. Under this standard, comprehensive income is defined as the change in equity (net assets) of a business enterprise during a reporting period from transactions and other events and circumstances from non equity-holder sources. Thus, the term comprehensive income includes all elements of net income under current generally accepted accounting principles with adjustments for certain other items, such as unrealized gains and losses on investment securities available for sale. Management has not completed its analysis of this new accounting standard. The new standard will become effective for the Corporation in 1998 and will require restatement of prior year comparative information. FASB Statement No. 131, "Disclosures About Segments of An Enterprise and Related Information" revises reporting of information about operating segments in annual and interim financial statements. This statement sets revised standards for disclosure about products and services, geographic areas and major customers. It is intended to promote a more practical approach to segment reporting by requiring presentation of information on the basis which is used internally by management for evaluating segment performance and allocation of resources to segments of the enterprise. Management has not completed its analysis of this new accounting standard. The new standard will be effective for the Corporation's financial statements in 1998 and thereafter and will require restatement of prior period information. A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Corporation's financial statements. Note E - Upcoming Stock Dividend On November 5, 1997, the Corporation announced a 10% stock dividend (one share for each ten shares held) for shareholders of record as of December 1, 1997 to be distributed on or about December 15, 1997. Upon issuance, the Corporation's earnings per share will be retroactively restated to give effect to the stock dividend. Page 8 of 21 9 PART I, ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Total assets approximated $634 million at September 30, 1997, an increase of $142 million from the December 31, 1996 level of $492 million. The consolidated balance sheets include the Corporation and its majority-owned subsidiaries. During the nine months ended September 30, 1997, two de novo banks and a second tier bank holding company were added. Effective May 22, 1997, Sun Community Bancorp Limited ("Sun"), a bank holding company, was formed in Tucson, Arizona for the purpose of acquiring a 100% ownership interest in Bank of Tucson (a 51% owned de novo bank formed in June 1996) in a stock for stock exchange transaction with the Bank of Tucson shareholders. As a result of the exchange transaction, Sun was capitalized at $4.5 million, of which $2.3 million is attributable to the Corporation. In June 1997, Sun completed a $4.5 million offering of 250,000 shares of common stock including $2.3 million invested by the Corporation (funded primarily by proceeds from exercise of warrants and borrowings) maintaining its 51% interest in Sun. Proceeds from the offering are expected to be used in Sun's expansion activities, primarily de novo bank development. On June 30, 1997 Valley First Community Bank, a de novo commercial bank, commenced operations in Scottsdale, Arizona. The Bank was capitalized with $4.5 million, of which $2.3 million was invested by Sun with the remainder invested by individuals and other entities primarily located in the Scottsdale/Phoenix areas. Valley First Community Bank is 51% owned by Sun and, accordingly, is consolidated with Sun for financial reporting purposes. Because of the Corporation's majority interest in Sun, Sun's consolidated financial position and results of operations are included in the Corporation's consolidated financial statements with corresponding accounting recognition of applicable minority interest. Brighton Commerce Bank, in Brighton, Michigan, was formed in early January 1997 and was capitalized with $2.7 million of which $1.6 million was invested by the Corporation. The Corporation's investment in this new bank was funded primarily from proceeds from exercise of stock options and borrowings. The Corporation owns 59% of the common stock of Brighton Commerce Bank and, accordingly, it is consolidated for financial reporting purposes with corresponding accounting recognition given to applicable minority interest. Portfolio loans increased during the 1997 nine-month period by approximately $104 million, more than double the corresponding net volume in 1996. Of the interim 1997 loan growth, $28 million occurred at Ann Arbor Commerce Bank, resulting from its significant asset and deposit growth during the period, with the remainder occurring at the Corporation's other mature banks and Page 9 of 21 10 de novo banks. Loan growth was generally funded by higher levels of interest-bearing deposits. The majority of 1997 portfolio loan growth occurred in commercial loans, which increased approximately $82 million, consistent with the banks' emphasis on commercial lending activities. The allowance for loan losses at September 30, 1997 approximated $5.8 million or 1.25% of total portfolio loans, slightly less than the year-end 1996 ratio of 1.28%. The 1997 decrease in the ratio of the allowance for loan losses to total portfolio loans relates primarily to loan origination activities of de novo banks for which, because of absence of prior loss experience, a lower allowance ratio is appropriate. Provisions for loan losses have been maintained at a higher level in 1997 ($1,442,000) relative to 1996 ($751,000) commensurate with portfolio growth, levels of delinquent and other nonperforming loans and other factors. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on evaluation of the portfolio (including volume, amount and composition, potential impairment of individual loans and concentrations of credit), past loss experience, current economic conditions, loan commitments outstanding and other factors. The following table summarizes portfolio loan balances and activity in the allowance for loan losses for the interim periods (in thousands):
1997 1996 ----------- ----------- Allowance for loan losses at January 1 $ 4,578 $ 3,687 Loans charged-off: Commercial 474 186 Real estate mortgage 76 Installment 17 45 -------- -------- Total charge-offs 567 231 Recoveries: Commercial 281 43 Real estate mortgage 6 6 Installment 18 5 -------- -------- Total recoveries 305 54 -------- -------- Net charge-offs 262 177 Additions to allowance charged to expense 1,442 751 -------- -------- Allowance for loan losses at September 30 $ 5,758 $ 4,261 ======== ======== Average total portfolio loans for period ended September 30 $406,096 $306,735 ======== ======== Ratio of net charge-offs to average portfolio loans outstanding 0.06% 0.06% ======== ========
Page 10 of 21 11 The allowance for loan losses is a general allowance for the loan portfolio. For internal purposes, management allocates the allowance to all loan classifications. The amounts allocated in the following table (in thousands), which includes all loans for which, based on the Corporation's loan rating system, management has concerns, should not be interpreted as an indication of future charge-offs. In addition, amounts allocated are not intended to reflect the amount that may be available for future losses, since the allowance is a general allowance.
September 30, 1997 December 31, 1996 --------------------------- -------------------------- % % Total Total Portfolio Portfolio Loans Loans --------- --------- Commercial $ 2,702 .59% $ 2,281 .64% Real estate mortgage 77 .02 67 .02 Installment 160 .03 100 .03 Unallocated 2,819 .61 2,130 .59 -------- -------- -------- -------- Total allowance for loan losses $ 5,758 1.25% $ 4,578 1.28% ======== ======== ======== ======== Total portfolio loans outstanding $461,371 $357,623 ======== ========
In addition to the allowance for loan losses, certain loans are enrolled in a Michigan state government loan program and have additional reserves established to provide for loss protection. At September 30, 1997, total loans under this program approximated $15.6 million. Reserves related to these loans, which are represented by earmarked funds on deposit at certain of the bank subsidiaries, approximated $1.7 million and are not included in the recorded allowance for loan losses. Impaired loans (i.e., loans for which there is a reasonable probability that borrowers would be unable to repay all principal and interest due under the contractual terms of the loan documents) were not material in 1996 and through September 30, 1997. Nonperforming loans (i.e., loans which are 90 days or more past due and loans on nonaccrual status) at September 30, 1997 amounted to $3.8 million compared with $2.7 million at December 31, 1996 as summarized in the following table (in thousands):
Sept 30 Dec 31 1997 1996 --------- ---------- Nonaccrual loans: Commercial $ 2,239 $ 928 Real estate 205 107 Installment 21 22 --------- ---------- Total nonaccrual loans 2,465 1,057 Past due (>90 days) loans: Commercial 1,032 1,009 Real estate 214 549 Installment 118 84 --------- ---------- Total past due loans 1,364 1,642 --------- ---------- Total nonperforming loans $ 3,829 $ 2,699 ========= ==========
Page 11 of 21 12 The interim 1997 increase in nonperforming loans relates to a small number of loans (primarily in nonaccrual status as of September 30, 1997). Such increase is deemed by management to be consistent with the seasoned status of the Corporation's more mature banks' portfolios (certain of which had minimal levels of nonperforming loans previously) and peer trends. All of such loans are in varying stages of resolution and are believed to be adequately secured by collateral (primarily real estate) or have other loss protection in the form of governmental guarantees or other credit enhancements. If nonperforming loans (including loans in nonaccrual status) had performed in accordance with their contractual terms during the period, additional interest income of $135,000 and $73,000 would have been recorded for the nine months ended September 30, 1997 and 1996, respectively. Interest income recognized on loans in nonaccrual status for the period approximated $42,000 and $23,000, respectively. Other real estate owned (generally real estate acquired through foreclosure or a deed in lieu of foreclosure and classified as a component of other assets) was less than $500,000 at September 30, 1997 and December 31, 1996. The following comparative analysis summarizes each bank's total portfolio loans, allowance for loan losses, nonperforming assets and certain ratios (dollars in thousands):
Allowance as a Percentage of Total Allowance for Nonperforming Total Portofolio Loans Loan Losses Loans Portofolio Loans --------------------- ------------------ ------------------- ---------------- Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 Sept 30 Dec 31 1997 1996 1997 1996 1997 1996 1997 1996 --------- ---------- -------- -------- --------- -------- ------ ----- Ann Arbor Commerce Bank $107,401 $ 79,463 $1,428 $1,088 $ 398 $ 304 1.33% 1.37% Brighton Commerce Bank 10,425 n/a 105 n/a --- n/a 1.01 n/a Capitol National Bank 88,811 80,749 1,219 1,076 893 797 1.37 1.33 Grand Haven Bank 32,727 26,162 386 303 189 --- 1.18 1.16 Macomb Community Bank 16,457 5,821 165 59 5 --- 1.00 1.01 Oakland Commerce Bank 56,650 54,569 664 655 860 1,227 1.17 1.20 Paragon Bank & Trust 56,564 46,680 639 563 734 44 1.13 1.21 Portage Commerce Bank 68,727 58,177 925 785 750 327 1.35 1.35 Sun Community Bancorp Limited: Bank of Tucson 19,324 4,850 194 49 --- --- 1.00 1.01 Valley First Community Bank 3,180 n/a 33 n/a --- n/a 1.04 n/a Other, net 1,105 1,152 --- --- --- --- --- --- -------- -------- ------ ------ ------ ------ ---- ---- Consolidated $461,371 $357,623 $5,758 $4,578 $3,829 $2,699 1.25% 1.28% ======== ======== ====== ====== ====== ====== ==== ==== n/a - Not applicable
Noninterest-bearing deposits approximated 11.88% of total deposits at September 30, 1997, a decrease from the December 31, 1996 level of 14.4%. Levels of noninterest-bearing deposits fluctuate based on customers' transaction activity. Page 12 of 21 13 Results of Operations Net income for the nine months ended September 30, 1997 amounted to $4.1 million, an increase over the $3.4 million earned during the corresponding period of 1996. Operating results (in thousands) were as follows:
Nine months ended September 30 ------------------------------------------------- Return on Total Assets Net Income Beginning Equity ------------------------- --------------------- ------------------------ Sept 30 Dec 31 1997 1996 1997 1996 1997 1996 ----------- ----------- -------- -------- -------- --------- Ann Arbor Commerce Bank $128,269 $105,651 $ 1,425 $ 841 28.55% 22.80% Brighton Commerce Bank (2) 14,277 n/a (399) n/a n/a n/a Capitol National Bank 113,035 104,254 1,327 1,125 22.07 20.74 Grand Haven Bank 42,691 32,731 237 159 11.24 8.02 Macomb Community Bank (1) 39,748 15,123 (101) (18) n/a n/a Oakland Commerce Bank 87,731 71,095 644 430 15.80 11.04 Paragon Bank & Trust 68,743 63,752 526 475 15.64 12.51 Portage Commerce Bank 85,875 73,769 873 805 22.19 22.69 Sun Community Bancorp Limited: (3) Bank of Tucson (1) 38,574 17,276 12 (59) .31 n/a Valley First Community Bank (2) 7,986 n/a (119) n/a n/a n/a Mortgage banking 2,787 2,831 (282) (93) n/a n/a Other, net 4,110 5,781 (85) (238) n/a n/a -------- -------- ------- ------- ------ ------ Consolidated $633,826 $492,263 $ 4,058 $ 3,427 13.47% 14.80% ======== ======== ======= ======= ====== ======= Nine months ended September 30 -------------------------------- Return on Average Assets -------------------------------- 1997 1996 --------- --------- Ann Arbor Commerce Bank 1.66% 1.35% Brighton Commerce Bank (2) n/a n/a Capitol National Bank 1.65 1.56 Grand Haven Bank .82 .85 Macomb Community Bank (1) n/a n/a Oakland Commerce Bank 1.13 .83 Paragon Bank & Trust 1.07 1.16 Portage Commerce Bank 1.40 1.59 Sun Community Bancorp Limited: (3) Bank of Tucson (1) .06 n/a Valley First Community Bank (2) n/a n/a Mortgage banking n/a n/a Other, net n/a n/a --------- -------- Consolidated .97% 1.11% ======== ======== n/a - Not applicable. (1) - Bank of Tucson and Macomb Community Bank, de novo banks, commenced operations in June and September 1996, respectively. (2) - Brighton Commerce Bank and Valley First Community Bank, de novo banks, commenced operations in January and June 1997, respectively. (3) - Effective May 22, 1997, Sun Community Bancorp Limited, a bank holding company 51% owned by the Corporation, was formed in Tucson, Arizona and acquired a 100% ownership interest in Bank of Tucson.
Net interest income increased 31.6% during the nine month 1997 period versus the corresponding period of 1996, primarily due to increased loans and deposits. Noninterest income increased in 1997 to $1.7 million for the nine month period, as compared with $1.2 million for the corresponding 1996 period. The increase related primarily to a nonrecurring gain from the sale of a bank building and land parcel in the first quarterly period of 1997. Service charge income increased 14% and trust fee income increased 23% in 1997 compared to interim 1996 periods. The provision for loan losses amounted to $1.4 million for the nine month 1997 period compared to $751,000 for the corresponding period of 1996. The increased interim provision for loan losses relates primarily to portfolio growth. The provision for loan losses is based on management's analysis of the loan portfolio as discussed elsewhere herein. Noninterest expense for the nine months ended September 30, 1997 approximated $11.9 million compared with $8.8 million in 1996. The increase in noninterest expense is associated with newly formed banks, growth and increases in general operating costs. Liquidity and Capital Resources The principal funding source for asset growth and loan origination activities is deposits. Total deposits increased $127 million for the nine month 1997 period, compared to $52 million in 1996. Such growth occurred in all deposit categories, with the majority coming from time Page 13 of 21 14 deposits. The Corporation's banks generally do not rely on brokered deposits as a key funding source; brokered deposits approximated $22.5 million as of September 30, 1997. Cash and cash equivalents amounted to $82 million at September 30, 1997 as compared with $63 million at December 31, 1996, 13% of total assets. As liquidity levels vary continuously based on customer activities, amounts of cash and cash equivalents can vary widely at any given point in time. Management believes the Corporation's liquidity position at September 30, 1997 is adequate to fund loan demand and meet depositor needs. In addition to cash and cash equivalents, a source of long-term liquidity is the Corporation's marketable investment securities. The Corporation's liquidity requirements have not historically necessitated the sale of investments in order to meet liquidity needs. It also has not engaged in active trading of its investments and has no intention of doing so in the foreseeable future. At September 30, 1997 and December 31, 1996, the Corporation had approximately $62 million and $49 million, respectively, of investment securities classified as available for sale which can be utilized to meet various liquidity needs as they arise. In the interim 1997 period, maturities from investment securities available for sale were deployed, in part, to fund higher yielding commercial bank growth. At September 30, 1997, the Corporation had lines of credit from an unrelated financial institution aggregating $10 million. Under this credit facility, borrowings outstanding approximated $8.8 million at September 30, 1997 ($3.5 million at December 31, 1996). Proceeds from 1997 borrowings have been deployed in de novo bank formation and other expansion opportunities. Under the terms of the credit agreement, $8 million is convertible into long-term notes; $2 million of the lines of credit are revolving and are reviewed annually for continuance. Future funding for formation of new banks (to the extent not otherwise funded by internal capital resources) or other needs may be met by additional future borrowings or other sources. Subsequent to September 30, 1997, the Corporation negotiated an increase of $3 million in facilities with its primary lender. Two of the Corporation's banks, (Oakland Commerce Bank and Ann Arbor Commerce Bank) have secured lines of credit with a Federal Home Loan Bank. Borrowings thereunder approximated $3 million and additional borrowing capacity approximated $23.5 million at September 30, 1997. The Corporation recently announced a fourth quarterly cash dividend of $.10 per share (payable December 1, 1997 to shareholders of record as of November 1, 1997). The dividend amounts in 1997 represent an increase over the dividends of $.0825 per share paid quarterly in 1996. On November 5, 1997, the Corporation announced a 10% stock dividend (one share for each ten shares held) for shareholders of record as of December 1, 1997 to be distributed on or about December 15, 1997. Upon issuance, the Corporation's earnings per share will be retroactively restated to give effect to the stock dividend. As discussed previously, certain investment securities are designated as "available for sale" and, accordingly, are adjusted to market value at the balance sheet date (net of Page 14 of 21 15 corresponding tax effect). Changes in market values of investment securities at their respective balance sheet dates marginally increased stockholders' equity during the nine months ended September 30, 1997. The Corporation and its banks are subject to complex regulatory capital requirements which require maintaining certain minimum capital ratios. These ratio measurements, in addition to certain other requirements, are used by regulatory agencies to determine the level of regulatory intervention and enforcement applied to financial institutions. The Corporation and each of its banks are in compliance with the regulatory requirements and management expects to maintain such compliance in the foreseeable future. Shareholders' equity, as a percentage of total assets, approximated 6.9% at September 30, 1997, a decrease from the beginning of the year ratio of 8.2%. Total capital funds, the Corporation's stockholders' equity and minority interest in consolidated subsidiaries, approximated 8.5% of total assets at September 30, 1997. The Corporation and each of its banking subsidiaries continue to exceed regulatory capital requirements as shown on the following page (dollars in thousands). Page 15 of 21 16
Ann Arbor Brighton Capitol Grand Macomb Oakland Paragon Commerce Commerce National Haven Community Commerce Bank & Bank Bank(1) Bank Bank(1) Bank(1) Bank Trust ------------ ------------ --------- ---------- --------- -------- ---------- Financial Position: Total Assets $128,269 $14,277 $113,035 $42,691 $39,748 $87,731 $68,743 Total Assets for Risk-Based Capitol Purposes 129,689 14,382 114,249 43,069 39,906 88,391 69,329 Risk-Weighted Assets 99,382 11,525 83,518 27,683 19,533 59,958 57,118 Tier I Capital 8,802 2,101 8,662 3,395 3,487 5,682 5,227 Allowable Tier II Capital 1,236 105 1,047 386 165 664 639 Tier I and Allowable Tier II Capital, Combined 10,038 2,206 9,709 3,781 3,652 6,346 5,866 Ratios Based of Financial Position: Ratio of Tier I Capital to Risk-Weighted Assets 8.86% 18.23% 10.37% 12.26% 17.85% 9.48% 9.15% Ratio of Combined Tier I and Tier II Capital to Risk-Weighted Assets 10.10% 19.14% 11.63% 13.66% 18.70% 10.58% 10.27% Leverage Ratio 6.86% 14.72% 7.66% 8.23% 8.77% 6.48% 7.60% Ratios Required: Tier I 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% Leverage Ratio 4.00% 8.00% 4.00% 8.00% 8.00% 4.00% 4.00% Sun Portage Community Capitol Commerce Bancorp Bancorp Bank Limited Ltd. Consolidated -------- --------- ------- ------------ Financial Position: Total Assets $85,875 $46,903 $54,380 $633,826 Total Assets for Risk-Based Capitol Purposes 86,785 46,754 50,215 635,419 Risk-Weighted Assets 65,286 27,375 49,974 454,242 Tier I Capital 5,973 11,391 41,457 51,242 Allowable Tier II Capital 817 227 (777) 4,509 Tier I and Allowable Tier II Capital, Combined 6,790 11,618 40,680 55,751 Ratios Based of Financial Position: Ratio of Tier I Capital to Risk-Weighted Assets 9.15% 41.61% 82.96% 11.28% Ratio of Combined Tier I and Tier II Capital to Risk-Weighted Assets 10.40% 42.44% 81.40% 12.27% Leverage Ratio 6.96% 20.53% 82.15% 7.05% Ratios Required: Tier I 4.00% 4.00% 4.00% 4.00% Tier I and Tier II Combined 8.00% 8.00% 8.00% 8.00% Leverage Ratio 4.00% 3.00% 3.00% 4.00%
(1) As a condition of bank charter approval, de novo banks are generally required to maintain Tier I leverage capital-to-assets ratios of not less than 8% for the first three full years of operations. Page 16 of 21 17 During the nine months ended September 30, 1997 the Corporation issued 218,283 shares of previously unissued common stock upon exercise of stock options and warrants, yielding proceeds of $1.9 million. Proceeds from exercise of warrants ($1.2 million) relate to a 1994 merger transaction from which such warrants expired June 30, 1997. Additionally, the Corporation entered into a transaction with its employee stock ownership plan ("ESOP") whereby the ESOP purchased 60,176 shares of previously unissued common stock, payable to the Corporation in the form of a note in the amount of $1 million. Such note receivable from the ESOP is classified as a deduction from stockholders' equity and will be funded by future ESOP contributions to be made by the Corporation and participating subsidiaries. As of September 30, 1997, applications for regulatory approval to form de novo banks in the Michigan communities of Muskegon and Grand Rapids were pending which, if approved and subject to other contingencies, would be majority-owned by the Corporation. The Corporation's operating strategy is focused on continuing development of de novo banks and the ongoing growth of its existing banks, coupled with the efficiencies from consolidation of bank operations. Management continues to be actively engaged in the ongoing process of exploring opportunities for future growth (which includes de novo bank formation and other growth strategies). Accordingly, the Corporation may invest in or otherwise add additional banks in future periods, subject to economic conditions and other factors, although the timing of such additional banking units, if any, is uncertain. Such future de novo banks and/or additions of other operating units could be either wholly-owned, majority-owned or otherwise controlled by the Corporation. Management believes the Corporation's capital resources at September 30, 1997 to be adequate to fund existing operations, future growth and expansion of existing banks. Impact of New Accounting Standards The Financial Accounting Standards Board ("FASB") has issued certain new standards which affect accounting and financial reporting. FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", establishes new guidelines for accounting for certain transactions, such as sales of loans and loan participations. This new standard became effective for the Corporation January 1, 1997. Implementation of this new accounting standard had no impact on the Corporation's financial position or results of operations for the period ended September 30, 1997. FASB Statement No. 128, "Earnings per Share", will revise the computation and reporting of earnings per share. This new standard is intended to simplify the basis upon which per-share amounts are determined, replacing "primary" earnings per share with "basic" earnings per share. "Fully diluted" earnings per share will be replaced with "diluted" earnings per share. Page 17 of 21 18 The Statement will become effective for the Corporation's year end 1997 consolidated financial statements and will result in restatement of per-share amounts for prior periods. Early adoption of the new standard is not permitted. Management has completed its preliminary analysis of this new accounting standard and a comparative analysis of the impact of its computations is set forth in Note D of the accompanying Notes to Financial Statements, which is incorporated herein by reference. FASB Statement No. 129, "Disclosure of Information about Capital Structure", clarifies the extent and nature of disclosures relating to an entity's capital structure. It requires nonpublic companies to disclose information which has been required for public companies in the past. This new standard will become effective for the Corporation's year end 1997 consolidated financial statements and, upon implementation, is not expected to have a material impact. FASB Statement No. 130, "Reporting of Comprehensive Income" addresses the reporting and display of 'comprehensive income' and its components (revenue, expenses, gains and losses) in a full set of financial statements. Under this standard, comprehensive income is defined as the change in equity (net assets) of a business enterprise during a reporting period from transactions and other events and circumstances from non equity-holder sources. Thus, the term comprehensive income includes all elements of net income under current generally accepted accounting principles with adjustments for certain other things, such as unrealized gains and losses on investment securities available for sale. Management has not completed its analysis of this new accounting standard. The new standard will become effective for the Corporation in 1998 and will require restatement of prior year comparative information. FASB Statement No. 131, "Disclosures About Segments of An Enterprise and Related Information" revises reporting of information about operating segments in annual and interim financial statements. This statement sets revised standards for disclosure about products and services, geographic areas and major customers. It is intended to promote a more practical approach to segment reporting by requiring presentation of information on the basis which is used internally by management for evaluating segment performance and allocation of resources to segments of the enterprise. Management has not completed its analysis of this new accounting standard. The new standard will be effective for the Corporation's financial statements in 1998 and thereafter and will require restatement of prior period information. At any time, there are a number of proposed new accounting standards under consideration by standard-setting bodies, bank regulatory agencies and other entities. Because of the fluid status of such proposals, the potential impact thereof on the Corporation's financial statements is unclear. Page 18 of 21 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Corporation and its subsidiaries are parties to certain ordinary, routine litigation incidental to their business. In the opinion of management, liabilities arising from such litigation would not have a material effect on the Corporation's consolidated financial position or results of operations. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and reports on Form 8-K. (a) Exhibits: (11) Statement regarding computation of per share earnings. (27) Financial Data Schedule. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended September 30, 1997. Page 19 of 21 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAPITOL BANCORP LTD. (Registrant) \s\ Joseph D. Reid -------------------------------------- Chairman, President and CEO (duly authorized to sign on behalf of the registrant) \s\ Lee W. Hendrickson -------------------------------------- Vice President and Chief Financial Officer Date: November 14, 1997 - ------------------------ Page 20 of 21 21 EXHIBIT INDEX Exhibit No. Description ----------- --------------------- 11 Statement regarding computation of per share earnings 27 Financial Data Schedule Page 21 of 21 EX-11 2 EX-11 1 EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS CAPITOL BANCORP LTD.
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1997 1996 (A) 1997 1996 (A) ---------- ----------- ---------- ----------- Computation of number of common shares and common stock equivalents for primary net income per share: Weighted average number of common shares outstanding 4,723,194 4,374,598 4,616,866 4,054,358 Net effect of dilutive stock options and warrants -- based on the treasury stock method 207,455 132,003 168,193 120,284 ---------- ---------- ---------- ---------- Weighted average number of common shares and common stock equivalents for primary net income per share 4,930,649 4,506,601 4,785,059 4,174,642 ========== ========== ========== ========== Computation of number of common shares and common stock equivalents for fully diluted net income per share: Weighted average number of common shares outstanding 4,723,194 4,374,598 4,616,866 4,054,358 Net effect of dilutive stock options and warrants -- based on the treasury stock method 268,520 195,533 268,520 191,689 ---------- ---------- ---------- ---------- Weighted average number of common shares and common stock equivalents for fully diluted net income per share 4,991,714 4,570,131 4,885,386 4,246,047 ========== ========== ========== ========== Net income for the period $1,475,476 $1,177,700 $4,057,887 $3,426,885 ========== ========== ========== ========== Primary Net Income Per Share $ 0.30 $ 0.26 $ 0.85 $ 0.82 ========== ========== ========== ========== Fully Diluted Net Income Per Share $ 0.30 $ 0.26 $ 0.83 $ 0.81 ========== ========== ========== ==========
(A) As adjusted to reflect the Corporation's 1996 10% stock dividend as if it had occurred at the beginning of the period. EX-27 3 EX-27
9 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 22,443 145 59,450 0 62,357 0 0 471,371 5,758 633,826 563,308 3,000 5,047 8,825 0 0 36,818 7,011 633,826 30,703 4,740 8 35,451 17,165 17,633 17,818 1,442 30 11,915 6,163 4,058 0 0 4,058 .85 .83 0 2,465 1,364 0 0 4,578 567 305 5,758 5,758 0 2,819
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